Monday 13 August 2012

Unisem (M) - Not Good Enough For Now


After missing targets, we are slashing FY12/FY13 net profit estimates for Unisem by 96%/43% respectively. We also pegged the stock to 0.8x FY13 P/NTA, reverting to a 40% discount to the historical five-year sector average of 1.4x to derive a FV of  RM1.21.  There  is  foreseeable  further downward  pressure  on  its  share  price  in the  short-term  due  to  negative  market  sentiment,  and  we  advise  investors  to accumulate the stock only at lower levels. For now, we downgrade the stock to a NEUTRAL.
Flat growth for 3Q. After attending the company’s analyst briefing last Friday, we were taken aback to hear its management guiding flat q-o-q revenue growth in 3Q2012, citing a challenging operating environment in 2H2012. Unisem’s 3Q is traditionally stronger q-o-q.  It  also  foresees  not  being  able  to  wipe  off  1H2012’s  cumulative  losses.  Initial expectations  were  to  see  a  recovery  in  the  last  quarter,  followed  by  stronger  growth momentum  for  the  rest  of  the  fiscal  year.  However,  its  2Q2012  results  were disappointing, missing our and consensus estimates.

Brighter prospects in Chengdu. Unisem’s Chengdu operations have broke  even and the  management  is  optimistic  over  its  future  revenue  contribution.  Over  the  previous quarter,  the  facility  kicked  off  wafer  bumping  and  wafer  level  chip  scale  packaging (WLCSP)  works  for  Amalfi,  Silego  and  AWN.  It  is  still  awaiting  full  wafer  bumping qualification  work  orders  from  Texas  Instruments.  The  company  aims  to  increase  their flip chip bumping capacity to 35m units by September.

A  15%  increase  in  ASP  for  leaded  packages.  Back  in  Ipoh,  management  freed  up space by consolidating Departments 1 & 2 for future WLCSP and Modules works. They also notified a few major customers of a 15% increase in average selling prices (ASP) for selected leaded packages, effective 1 Jan  2013. It still remains to be seen  whether customers  are  agreeable  to  the  new  terms,  though  we  believe  they  will  be  compliant with the price change as these are basically legacy products and they may face a price increase in switching over to competitors anyways.

Looking to further curb margin erosion. Unisem’s management is currently analysing its profitability by packages and by customers in Batam, similar to what has been done in  its  other  regional  operations.  They  will  unhesitatingly  drop  unprofitable  customers, and  have  trimmed  its  customers  to  only  100+,  from  a  previous  300+.  The  Batam operation focuses  its services  on  the  auto segment  and  there  were  reports  from major auto suppliers claiming excess inventory build-up. Management will monitor the situation and allocate resources accordingly.
Capex  spending  to  ramp  up.  The  company  said  they  will  rev  up  spending  in  2H2012  to  bring  its  full-year capex toRM150m-RM160m. It spent RM50.9m in the previous half-year. As highlighted, it is looking to  increase  its  flip  chip  bumping  capacity  in  Chengdu  to  35m  units  as  it  is  already  operating  at  a  full utilization rate.

FV revised to RM1.21, downgrade to NEUTRAL. We are slashing our FY12/FY13 net profit estimates by 96%/43% respectively. Even though management is doing the right things to improve its gross profit margin,  depreciation  charges  (YTD:  +7%  y-o-y)  and  interest  expenses  (YTD:  +38%  y-o-y)  will  likely  be key culprits dragging down bottom lines in the near term. The stock, now downgraded to a NEUTRAL, is pegged to 0.8x FY13 P/NTA, reverting to a 40% discount to the historical five-year sector average of 1.4x to  derive  a  FV  of  RM1.21.  We  remain  cautious  on  the  global  macroeconomic  environment  as  the recovery  of  US  and  Europe  markets  are  still  uncertain,  plus  China  is  only  beginning  to  show  signs  of slower economic growth.

Source: OSK

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